Gabriele Sabato
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Z-score vs minimum variance preselection methods for constructing small portfolios
Francesco Cesarone , Fabiomassimo Mango , Gabriele Sabato doi: http://dx.doi.org/10.21511/imfi.17(1).2020.06Investment Management and Financial Innovations Volume 17, 2020 Issue #1 pp. 64-76
Views: 1111 Downloads: 438 TO CITE АНОТАЦІЯSeveral contributions in the literature argue that a significant in-sample risk reduction can be obtained by investing in a relatively small number of assets in an investment universe. Furthermore, selecting small portfolios seems to yield good out-of-sample performances in practice. This analysis provides further evidence that an appropriate preselection of the assets in a market can lead to an improvement in portfolio performance. For preselection, this paper investigates the effectiveness of a minimum variance approach and that of an innovative index (the new Altman Z-score) based on the creditworthiness of the companies. Different classes of portfolio models are examined on real-world data by applying both the minimum variance and the Z-score preselection methods. Preliminary results indicate that the new Altman Z-score preselection provides encouraging out-of-sample performances with respect to those obtained with the minimum variance approach.